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Guide To The Advantages Of Investing Overseas

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Contributor:
Paul Ambrose
Paul Ambrose

Many New Zealanders feel that they would rather stick close to home and invest in companies based in New Zealand.  Besides, it’s more work to research shares in foreign companies, and don’t you have to pay more taxes on shares held in international companies, anyway?  

For a number of reasons, the above thinking is short-sighted and can lead to some serious financial consequences.

Lack of diversification

Diversification means that you own shares in lots of different companies, preferably in many different industries and locations.  The advantage of this is clear:  if there is a downturn in one sector or a recession in one particular location, the other sectors or locations in your portfolio may remain untouched—in fact, they may even go up. 

The wise investor will distribute his money between at least 10 or 15 stocks.  A side note here:  diversification does not mean you buy a few shares in some Australian companies and call it quits.  The New Zealand share market is about 0.05% of the total world market, and Australia is not much bigger:  about 2%.  A truly diversified portfolio will include funds from all over the world.

Shares vs. funds

While it sometimes makes sense to buy shares directly rather than through a professionally managed fund, for most people the advantages of a fund outweigh the costs. 

An individual investor might have enough cash at his disposal to buy shares in 10 to 20 different companies.  A fund manager will have much, much more money to play with—and consequently can spread his risk over many more companies.  An average fund will own shares in hundreds of different companies, so if one goes belly-up, the effect is barely felt by any one individual investor. 

Even if you have invested in 10 different companies, if you absorb a total loss in one of those companies, you will definitely feel it.  Besides all that, owning shares in international companies through a fund makes the tax consequences and distribution of dividends their problem rather than yours.  

The canceling effect of foreign exchange markets

Many people fear that if they invest in overseas companies, the gains they would otherwise see will be wiped out by a drop in the NZ dollar or rises in the value of the overseas currency.  However, it is important to think clearly about things here.  If, as most people do, you are investing for retirement, much of your future investment savings may end up being spent on things made overseas, or even on overseas travel itself. 

If the NZ dollar does go up, the prices of these things will go down at the same rate.  If, on the other hand, the NZ dollar drops, the relative value of your overseas investments will be much higher.  Either way, the effect of rises or falls in currency values is probably minimal.  

For some people, investing strictly in New Zealand (and possibly some Australian) shares makes sense:  those who are only interested in regular, tax-free dividends.  For most others, international funds offer a relatively low-risk way to diversify a portfolio.

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